Final Results - Part 1
Slough Estates PLC
21 March 2001
PART 1
SLOUGH ESTATES plc
PRELIMINARY RESULTS
FOR THE YEAR ENDED 31st DECEMBER 2000
Results Percentage
Changes
Net assets per share 553p (1999 : 476p) +16.2%
Diluted net assets per share 520p (1999 : 452p) +15.0%
Profit before tax £128.9m (1999 : £128.0m) +0.7%
Adjusted profit before tax* £128.3m (1999 : £115.8m) +10.8%
Earnings per share 25.8p (1999 : 24.6p) +4.9%
Adjusted earnings per share* 25.7p (1999 : 21.7p) +18.4%
Recommended final dividend 7.4p (1999 : 6.8p) +8.8%
Total dividend for year 12.1p (1999 : 11.2p) +8.0%
*adjusted to exclude investment property disposals
Sir Nigel Mobbs, Chairman, said.
'These results confirm the validity of the Group's strategic commitment to
building and owning quality buildings for businesses located in prime business
centres in the United Kingdom, Europe and North America. Our consistent
application of this strategy is delivering to shareholders superior growth in
both earnings and net assets per share.'
Summary
Earnings
Slough Estates announced today an increase in pre-tax profits adjusted to
exclude investment property sales of 10.8 per cent to £128.3m and adjusted
earnings per share of 25.7p, an increase of 18.4 per cent.
Dividends
A final dividend of 7.4p is recommended, which would represent a total
dividend of 12.1p per share, an increase of 8.0 per cent. The final dividend
will be paid on 18th May 2001 to those shareholders on the register on 27th
April.
Valuation
The Group's investment property portfolio valuation at 31st December 2000
amounted to £3,464 million after a £247 million or 7.7per cent revaluation
surplus. Net assets per share increased by 16.2 per cent (15.0 per cent
diluted). The total return for the year, including both income and capital
gains after tax and on an undiluted basis, was 18.7 per cent.
Significant achievements
The main achievements of a very active and strategically important year have
been:
* the completion of 290,930 sq.m. (3.13 million sq.ft.) of new business
space with a further 240,590 sq.m. (2.59 million sq.ft.) under
construction
* expenditure of £149 million on new construction and £115 million on
property acquisitions for the investment portfolio
* the leasing of 442,000 sq.m. (4.75 million sq.ft.) of new and existing
space
* the granting of planning consent for 155,000 sq.m. (1.67 million sq.ft.)
of office and R&D space at Farnborough and commencement of construction
of the infrastructure and a first phase of 11,560 sq.m. (125,000 sq.ft.)
* the acquisition of Cambridge Research Park with planning consent for up
to 56,000 sq.m. (600,000 sq.ft.)
* in France, 98,000 sq.m. (1.05 million sq.ft.) of warehousing was built
and leased at Marly la Ville, Paris
* in Belgium 64,000 sq.m. (685,000 sq.ft.) has been built or is under
construction at Pegasus Park, much of which is pre-leased to Cisco
Systems, Johnson Controls and Deloitte & Touche
* in the USA, 23 hectares of additional land for development was acquired
in South San Francisco adjacent to the current successful investments
The Group's development potential on land already owned has increased to some
1.4 million sq.m. (15 million sq.ft.) which would cost some £1.125 billion to
build out over the medium term.
Commenting on the future, Sir Nigel Mobbs, Chairman said:
'After a period of extended economic prosperity in North America and Europe,
there are clear indications that slower growth is to be expected. The
property sectors in all of our operating locations are better balanced and
more soundly financed than they have been for decades. Should other business
sectors begin to feel the economic strain, the lower risk characteristics of
property investment should become more apparent and attractive to investors.'
For further information contact:
Sir Nigel Mobbs, Chairman
Derek Wilson, Chief Executive
Dick Kingston, Finance Director
Tel: 01753 537171
(On 21st March only, after 2.00pm
telephone 0207 491 0177)
John Probert, Company Secretary
Tel: 01753 537171
Slough Estates web site : www.sloughestates.com
Issued by:
Andrew Best/Emily Bruning
Shared Value Limited
Tel: 0207 321 5010
email: abest@sharedvalue.net
EXTRACTS FROM THE CHAIRMAN'S STATEMENT TO SHAREHOLDERS
FOR THE YEAR ENDED 31ST DECEMBER 2000
The year 2000 has been successful both in financial terms and strategically.
An increase in adjusted earnings per share of 18.4 per cent and an increase in
diluted net assets per share of 15.0 per cent is largely as a consequence of
our development activity of recent years producing good incremental returns
over those which would have arisen through passive investment. Strategically
2000 was marked by a series of significant events which will enable continued
growth in earnings and assets including planning consent progress in
Farnborough, Cambridge and South San Francisco, completion and commencement of
531,520 sq.m. of new space, and expansion of the Group's development potential
by way of land acquisition.
These results confirm the validity of the Group's strategic commitment to
building and owning quality buildings for business located in prime business
centres in the United Kingdom, Europe and North America. Our consistent
application of this strategy is delivering to shareholders superior growth in
both earnings and net asset value per share.
Results
Profit before tax for 2000 amounted to £128.9 million compared with £128.0
million in 1999. The pre-tax profit included profits of £0.6 million (1999
£12.2 million which included £8.7 million from the rationalisation of the
Bilton portfolio) on the sale of investment properties. Adjusted to exclude
these amounts, profit before tax increased by 10.8 per cent. Adjusted
earnings per share were 25.7p (1999 21.7p), an increase of 18.4 per cent.
Diluted net assets per share were 520p compared with 452p for 1999, an
increase of 15.0 per cent. The debt to equity ratio was little changed at 54
per cent.
Dividends
Your Board recommends the payment of a final dividend of 7.4p per share which
together with the interim dividend of 4.7p per share represents an aggregate
distribution of 12.1p per share, an increase of 8.0 per cent for the year.
Valuation
The value of investment properties, taking into account the annual
revaluation, construction in progress at cost and prevailing exchange rates at
31st December 2000, amounted to £3,464 million (1999 £2,935 million).
Improved values across the portfolio reflect the success of the substantial
development programme, the quality of our location choices, the current
strength of property investment markets and our in-house management expertise.
The Group's investment property portfolio was valued externally on the basis
of an open market value in accordance with the requirements of the
professional bodies in each country. The revaluation gave rise to a surplus of
£247 million, an increase of 7.7 per cent.
In the United Kingdom, the valuation surplus was 8.2 per cent reflecting
stable yields, continuing growth in rental values and positive property
management. Completed development projects valued for the first time showed a
19.2 per cent surplus. The underlying portfolio value improvements were 7.7
per cent industrial, 9.3 per cent offices and 4.1 per cent retail. These
increases are again generally better than the value changes indicated by the
principal market indices, thus confirming the validity of the Group's overall
strategy of owning property in quality locations. Continuing rental growth has
resulted in the occupied UK portfolio being reversionary by 13.2 per cent.
In overseas markets values in North America increased by 7.2 per cent in the
USA and 0.3 per cent in Canada. In Europe values increased by 9.4 per cent
reflecting strong occupier and investment demand in both Belgium and France,
particularly for new developments.
The underlying assets of property joint ventures and associates were also
valued externally and resulted in a surplus of 2.9 per cent.
The total returns for the year, including both income and capital gains after
providing for tax and on an undiluted basis, were 18.7 per cent. Over the
past five years, the Group's compounded total returns have been 17.8 per cent
per annum.
For the future, it is our intention to start publishing interim valuation
figures with the half-yearly financial statement as at June 2001.
Summary of the Year
The main achievements of a very active year included:
- the completion of 290,930 sq.m. (3,130,000 sq.ft.) of new construction
in the UK, North America and Europe with a further 240,590 sq.m.
(2,590,000 sq.ft.) of new development currently in progress of which
73.0 per cent is now pre-leased or pre-sold
- during the year £149 million was spent on new construction and £115
million on property acquisitions
- the leasing of 442,000 sq.m. (4,757,000 sq.ft.) of new and existing
space
- planning permission has been granted for the master plan at the 72
hectare site at Farnborough and construction has now started on the
first phases of construction amounting to 11,560 sq.m.
- the acquisition of the Cambridge Research Park with planning consent for
up to 56,000 sq.m. of office and research space
- in France, 98,000 sq.m. (1,050,000 sq.ft.) of warehousing was built and
leased at Marly la Ville
- in the USA 23 hectares of additional land for development was acquired
in South San Francisco adjacent to the current successful investments
- in Belgium 64,000 sq.m. (685,000 sq.ft.) of new building is under
construction, much of which is pre-leased to Cisco Systems, Johnson
Controls and Deloitte & Touche
During the year 104,000 sq.m. of investment and trading property was sold,
primarily in the UK, France and Canada, realizing an aggregate of £92 million.
The Group's Strategy
We are experiencing a period of rapidly changing business, economic and
political conditions. Accordingly if we are to deliver our objectives of
producing growth in earnings per share and net asset value for shareholders,
we need to shape our property portfolio and development strategy to meet the
needs of modern business in a coherent and focused way. The strategic
principles are as follows:-
* We should own and develop a selection of business parks and industrial
and distribution estates in prime business centres that will be resilient
to change
* The accommodation we create must be flexible and economic, responding to
the end users' requirements. There will be an active programme of
construction and renovation in response to market demand
* We will tailor our property management to provide the best possible
support for those who occupy our properties and, where possible, work
with our customers to help them expand their businesses
* We will aim to maximize occupancy, cashflows and earnings from good
property management
* We will dispose of any properties that appear not to be able to add
material value to our portfolio
* For the foreseeable future we will concentrate the Group's portfolios in
the UK, continental Europe and North America.
Whilst our business is that of owning real estate and developing buildings,
the company can only prosper if it has a strong balance sheet, a proactive
funding policy and an emphasis on strong financial and management controls.
Therefore we will ensure that our performance in these financial areas is at
least as strong as it is within our primary property business.
Our strategy is consistent, robust and resilient to change. It also meets the
needs of our customers.
Recently we have undertaken a thorough review of the strategy in the light of
changing business, economic and political conditions. Our review has
concluded that the strategy remains relevant and that in application it
provides sufficient flexibility and sustainability to continue to add value in
the future.
Market Conditions
The year 2000 was a period of property market stability for both investment
and occupancy demand. Generally institutional sentiment towards property was
positive and as a consequence yields remained constant, though retail yields
weakened in response to perceived e-commerce threats and weaker retailing
margins. Investment demand for modern, well leased and well located out-of-
town business space was encouraging.
Occupancy demand for contemporary, well specified business space in prime
business locations generally outstripped supply. Strong location criteria
continue to dominate customer choice, including proximity to sources of power
and main fibre optic systems. The supply from new construction is under
control as banks remain reluctant to support new speculative development.
These are all market conditions that favour the Group's strategy of owning and
developing business space in prime business centres.
The Way Forward
Looking to the future, we remain confident that the Group provides value to
both its customers and its shareholders. The past year has been a traumatic
period for many new age businesses and the resilience of businesses with
tangible assets has been reinforced. There is no doubt, however, that modern
business is becoming increasingly more dependent upon the development and
application of knowledge to add value to their activities. The use of
information technology and advanced communication is critical to the survival
of many businesses. Businesses have to improve productivity and reduce costs
to remain competitive.
Through its UK and overseas operations, the Group will continue to provide
'Buildings for Better Business' in prime locations to assist customers in
their achievement of better performance.
People's lifestyle expectations are increasing and this challenges the need
for better health and service provision. Our programme of development of
laboratory space in California, Slough and Cambridge is meeting the need of a
diverse range of research and development businesses in the biotechnology and
health science fields. Our management skills and experience are geared to
satisfying the many needs of our customers and responding to opportunity as it
arises.
In all respects we believe that we can respond to demand, though we are
concerned that governments in most of the countries in which we operate claim
on the one hand that they support investment in modern business to ensure
competitiveness whilst on the other hand they introduce policies and
regulations that limit development, add cost to buildings and restrict freedom
of use. Oppressive red tape increases cost and delays needed investment
without necessarily providing any improvement to lifestyles or to the
environment.
The Year Ahead
After an extended period of economic prosperity in North America and Europe,
there are clear indications that slower growth is to be expected. The property
sectors in all our operating locations are better balanced and more soundly
financed than they have been for decades. Should other business sectors begin
to feel the economic strain, the lower risk characteristics of property
investment should become more apparent and attractive to investors.
The Board
At the conclusion of the Annual General Meeting, Mr. Roger Brooke will be
retiring from the Board having reached the age of 70. Mr. Brooke was first
appointed to the Board in 1980. He has throughout his service as a non-
executive director been a source of great wisdom and independent advice. I
would like to express my appreciation to him for his valuable contribution.
Lord Blackwell has been invited to join the Board as a non-executive director
with effect from 1st April. Norman Blackwell, who is aged 48, is currently a
non-executive director of Dixons Group Plc, Corporate Services Group plc and a
special advisor to KPMG Corporate Finance. He was formerly Director of Group
Development at Natwest, Head of the former Prime Minister's Policy Unit, and a
partner of McKinsey & Co.
EXTRACTS FROM THE CHIEF EXECUTIVE'S REVIEW
Throughout 2000 the Group benefited from favourable economic conditions and
sound property markets in each of its areas of operations in the UK, Europe
and North America. Significant progress has been made in delivering our
strategy of creating new cash flows from property development in prime
business centres and in obtaining planning consents which will enable the
Group to make starts on several new business park projects in 2001. Most
notably the Group is now able to commence construction on Farnborough Business
Park, Cambridge Research Park and Oyster Point in South San Francisco. This
will allow the development momentum of recent years to be increased at the
Group's discretion depending upon occupier demand at the time of each new
phase.
New development opportunities in prime business centre locations are not easy
to find, particularly at competitive prices. Consequently the new additions
to our development programme this year are important. Cambridge Research
Park, which was acquired in July, will ultimately comprise 56,000 sq.m. of R&D
and office space when fully developed. It is planned to provide a mix of
space for both large and small science and technology based businesses, built
in a high quality rural business environment. Similarly in South San
Francisco, the Oyster Point business park acquired in early 2000 has been
zoned for 53,000 sq.m. of office/R&D space to commence construction in 2001.
Demand from health science tenants has been very encouraging; a first phase
of 37,350 sq.m. starting in Spring 2001 is already 79 per cent covered by pre-
lets or letters of intent. At the end of 2000 a further site in South San
Francisco, at East Grand, was acquired for development as a research park.
This site will be processed for zoning during 2001 and could support 65,000
sq.m. of development. When completed the Group will have an aggregate of
over 200,000 sq.m. in this important location. At Pegasus Park, close to
Brussels airport, a contiguous site has been acquired which will allow a
55,000 sq.m. expansion of the business park to a total capacity of 275,000
sq.m.
Largely as a result of these additions the Group's development programme for
2001 onwards now extends to some 1.4 million sq.m. which will cost
approximately £1,125 million to deliver. Without exception, each of these
developments will produce initial rental returns significantly in excess of
the average cost of funds. It is this programme which will produce new
earnings enhancing cash flows and development gains to boost net assets per
share.
Not all of the Group's future potential will derive from development
activities. Skilful management of investment properties is the bread and
butter of the business. Continual improvement in the standards of estate
management and a willingness to be flexible towards customer needs will show
benefits in terms of revenues and values. Occupancy and rental rates are the
prime measures of success in this respect. With a worldwide rental income of
£216 million, any improvements in these measures flow to the bottom line.
Thus investment management, customer care, leasing and marketing are all areas
in which the Group endeavours to excel.
Occupancy at the end of 2000 was 93.6 per cent compared with 93.5 per cent the
year before. This is influenced by the significant number of new developments
which completed construction towards the year end.
UK Property
The focus of the Group's UK activity continues to be business parks and
industrial space, particularly in the South East and predominantly in the
Thames Valley area where demand for space remains good.
Leasing during the year was strong and estimated market rental rates increased
year on year by 6.1 per cent overall. Approximately 115,000 sq.m. were leased
to new tenants during the year and 28,000 sq.m. of expiring leases were
renewed which in total represents 7.5 per cent of the total UK portfolio.
Including those retail centres held in joint ventures, rents passing at year
end amounted to £172 million paid by 1,500 tenants. The UK portfolio extends
to 1.89 million sq.m. or 20 million sq.ft.
New developments completed during 2000 amounted to 63,580 sq.m., of which 62
per cent has been leased, and a further 26,400 sq.m. was under construction at
year end. At Slough the letting of new offices has been very positive.
Logical pre-let a 6,200 sq.m. R&D unit on Buckingham Avenue and the first two
buildings of the 190-208 Bath Road scheme currently under construction have
been leased to health science occupiers, a total of 7,625 sq.m. A third
building of 5,390 sq.m. commences construction in June when Combined Optical
Industries relocate to their new factory on Buckingham Avenue. Also at
Slough, the 4,270 sq.m. industrial development of five units built on the site
of the old banking centre was completed in October and four units are leased.
Two of the added value features of the Slough Trading Estate which are
becoming increasingly important are its exceptional communications and
reliable power supply. Seven cable providers cross the estate and Slough Heat
& Power provide an outstandingly reliable energy supply with surplus capacity
available to customers with large power requirements. The estate is already
home to three major telecoms switching centres and an internet data centre.
Elsewhere in the UK industrial developments have been completed or are under
construction at Feltham, Acton, Uxbridge, Wokingham, Luton, High Wycombe,
Southampton, Birmingham, Northampton and East Midlands Airport. At Centennial
Park, Elstree, a 5,146 sq.m. office has been built. Partly pre-let to Buhler,
interest in the balance of the scheme is encouraging.
In 2001 the pace of development will increase. In January at Farnborough
construction of the site infrastructure comprising over one mile of roads,
utilities provision and substantial landscaping works commenced. The planning
consent allows up to 155,000 sq.m. of office and R&D space, together with a
further 6,000 sq.m. of ancillary uses. Construction recently started on two
speculative office buildings, the larger at 9,290 sq.m. (gross) designed by
Foster & Partners and the smaller at 4,180 sq.m. (gross) by Allies & Morrison.
There is every expectation that Farnborough Business Park will ultimately be
one of the best business addresses in the UK.
Almost simultaneous with the start of works at Farnborough, the roads,
services and landscaping commenced at the Cambridge Research Park. This new
site was acquired in July and has consent for 46,000 sq.m. of office and R&D
space and a hotel, in addition to the two buildings acquired at the Park's
entrance. A first phase of 12,780 sq.m. commenced construction in January
comprising business units suitable for either office or R&D use and designed
to accommodate the new knowledge-based industries which are growing in
Cambridge. Due to its fenland environment particular attention is being given
to the landscaping and the wetland wildlife reserve which is part of the
landholding.
Other major developments are likely to be started in 2001 at Elstree, with
further office and industrial developments, and at Slough where a pre-let will
be sought for the 9,050 sq.m. 250 Bath Road site which becomes available in
June.
The Group's retail management team looks after 190,000 sq.m. of shopping
centres valued at £580 million of which £400 million is in Slough's ownership.
During the year, all of the seven centres recorded improved levels of shopper
visits. The Buchanan Galleries in Glasgow, opened in March 1999, is now
firmly established as the premier city centre shopping destination in
Scotland.
Just as the portfolio has been augmented with new developments, some £43
million has been raised through the sale of assets no longer fitting the
Group's requirements. Offices at Sheffield, Leeds and Woking were sold, as
were industrial properties at Bletchley, Enfield, Perivale and Cosham. Since
the year end two office properties have been sold at Aldersgate Street in the
City and at Bournemouth, realising £44 million.
Overseas
It is almost inevitable that a UK based company with a strategy of focusing on
prime business centres will be drawn to investing in those locations overseas
which are likely to perform as well as its best locations in the UK. The
growth in the Group's overseas investment of recent years is now showing
through strongly in earnings, contributing £39 million to pre-tax profits in
2000. The Group's overseas property investments now constitute 23 per cent of
its total portfolio by value, being 17 per cent in North America and 6 per
cent in Europe.
Canada
The Canadian economy has benefited from the strong US economy, with low
inflation, increasing employment and generally balanced provincial and federal
budgets. The property sector is sound with historically high occupancy and
firm rental levels.
In Toronto, 63,950 sq.m. of industrial space has been completed or is
approaching construction completion at Mississauga, Goreway and Oakville. In
most instances this has been leased prior to completion. As all land other
than at Oakville has been fully built out, a further 13 hectares were acquired
to expand the particularly successful Goreway estate by some 43,000 sq.m.
At Willingdon Park, Burnaby, Vancouver, construction started on a 20,800 sq.m.
speculative office in Spring 2000, to meet expected demand from the rapid
growth of high-tech industries in the City. In December, Nortel committed to
occupy at least 10,200 sq.m. and interest in the balance has prompted the
commencement of an adjacent 6,200 sq.m. building. This park is being
developed jointly with the Hospitals of Ontario Pension Fund. The Mayfair
estate at Port Coquitlam, Vancouver commenced construction in 2001 with a
first phase of 11,230 sq.m. industrial and warehouse space.
USA
The US economy was particularly strong during 2000 but in recent months has
slowed. Recent reductions in GDP growth and corrective reductions in interest
rates indicate a lower economic performance for 2001. The property market
generally remains sound, with occupier demand typically matching or exceeding
supply and the supply pipeline is unlikely to change that balance in the major
business centres.
The Group's activities in California have been particularly successful during
2000. Demand for space from the health science sector in both San Diego and
the San Francisco Bay area has resulted in full occupancy and strong demand
for pre-letting of new space to be developed on our recently acquired sites.
In Torrey Pines, San Diego, the Group's largest ever pre-letting deal was
agreed with Agouron, a research subsidiary of Pfizer. Slough is building for
them a research campus at the Torrey Pines Science Centre comprising 9,660
sq.m. already occupied, 21,650 sq.m. under construction currently and further
phases of up to 26,290 sq.m. for future delivery, totalling 57,600 sq.m., all
on long leases extending to 2017. Two speculative units of 7,690 sq.m. and
4,550 sq.m. are also in progress at the Centre, the larger of which is now
let. During the year the Group acquired a 7,900 sq.m. reversionary office/lab
building in Torrey Pines currently occupied by Agouron.
With all the Group's land ownership becoming rapidly built out in the San
Francisco Bay area, two new large sites were acquired during 2000. The
earlier acquisition of 9 hectares at Oyster Point, South San Francisco has now
been zoned with consent for 53,000 sq.m. of research and office space together
with a restaurant and a creche. Sited on the edge of the Bay and close to the
Group's other research parks at Gateway and Pointe Grand, demand for a first
phase of 37,350 sq.m. to start in Spring 2001 has been very strong from both
existing and new customers. We have pre-let commitments and letters of intent
covering 79 per cent of the entire phase.
Not far from this site, and adjacent to the vast Genentech research complex, a
further 11 hectare site has been acquired which is expected to gain consent
for some 65,000 sq.m. during the course of 2001.
Following completion of further research facilities for Fibrogen, Exelixis and
Sugen/Pharmacia totalling 19,500 sq.m., only one lot remains on our other Bay
Area site which is under option to Sugen/Pharmacia for a building of 6,500
sq.m..
The 110,000 sq.m. of industrial properties at Elk Grove, near Chicago's O'Hare
airport have been put to the market for sale following a significant re-
leasing programme during 2000.
Continental Europe
The economies of Belgium, France and Germany all showed signs of improvement
in 2000. Low inflation and low interest rates are forecast to continue.
Though unemployment levels remain relatively high the situation is improving
and the trend to a lower corporate tax burden should help secure continued
economic growth. Property markets have remained firm, particularly in the
prime business centres of Brussels, Paris and western Germany where the Group
has been long established.
Belgium
The scale of operations currently underway at Pegasus Park, next to Brussels
airport, makes it the Group's busiest location. The recent acquisition of a
contiguous site from Scania will allow the total developable area to be
increased to approximately 275,000 sq.m. of office space plus a 232 bed hotel.
To date 44,860 sq.m. have been built including two buildings totalling 14,080
sq.m. for Cisco Systems, the 13,500 sq.m. DHL building sold in 1998 and the
5,520 sq.m. Regus building completed early in 2000. Currently under
construction are a further two buildings for Cisco totalling 18,600 sq.m. and
a 16,010 sq.m. speculative office. In addition a 6,930 sq.m. European
headquarters has been pre-let to Johnson Controls on which construction
started in January 2001. The land dedicated to the hotel has been sold to the
hotel operator and construction is progressing under Slough's project
management.
Adjacent to Pegasus Park is a joint venture site known as Pegasus Park II
which has consent for 35,000 sq.m. During 2000 a 7,790 sq.m. office building
was completed for Deloitte & Touche and subsequently sold. A further 8,140
sq.m. office has commenced construction which has also been taken by Deloitte
& Touche.
It is projected that full development of these sites will not be completed
before 2007. The total project of 275,000 sq.m. is larger than any single
office park development in the UK and it is the Group's intention to retain a
major long term interest.
Elsewhere in Belgium two logistics parks, which have been acquired subject to
obtaining planning consents, are being prepared for development at Rumst and
Bornem, both close to the main highway between Antwerp and Brussels. Initial
phases totalling some 37,000 sq.m. are planned to start in 2001.
France
The Group's development strategy for Paris is centred on 'big box' warehouses
located close to the Francilienne outer ring road. The demand for large
distribution warehouses in the Paris region has continued whilst the supply of
land zoned for such uses has become more limited. Thus the purchase of the 25
hectare site at Marly la Ville, just north of Charles de Gaulle airport, at
the end of 1999 was well timed.
During 2000 the whole site was developed with four buildings totalling 97,725
sq.m. fully leased and occupied. Including the leased warehouse acquired with
the site, this distribution park is one of the best in Paris and will be
retained in the Group's investment portfolio which now amounts to 216,000
sq.m. of similar space. Though sites are hard to acquire, at St. Fargeau near
Orly a pre-let warehouse of 23,900 sq.m. is being built and an adjacent site
for up to 20,400 sq.m. is held on option.
The 4,385 sq.m. office redevelopment at Rue Vineuse near the Trocadero in
central Paris was completed and sold during the year at a substantial trading
profit. Though this was a very successful venture, recent office rental rate
increases and strong developer demand for possible sites have made it very
difficult to replicate.
Germany
For some years the Group has followed a niche market strategy in western
Germany, being the development, leasing and sale to institutional investors of
small, multi-let industrial parks. Most industrial property in Germany is
owner occupied and premises for those that would prefer to lease are limited.
During the year the 6,500 sq.m. estate at Neuss, near Dusseldorf, was sold and
terms were agreed for the sale of the three Willich Munchheide estates
totalling 26,430 sq.m. and the Duisburg 8,730 sq.m. development. This sale
was completed early in 2001.
New developments have been started at Monchengladbach, 4,660 sq.m. with a
5,000 sq.m. phase to follow later, Ratingen with a 9,212 sq.m. phase and at
Glinde near Hamburg with 5,496 sq.m. At Kapellen, south of Dusseldorf, a
larger land assembly is progressing with a first phase of 6,799 sq.m. under
construction and a further 13,560 sq.m. likely to start in 2001.
This current programme is the largest that the Group has undertaken in Germany
and its profitability should be reliably achieved.
Non Property Activities
Slough Heat & Power
Slough Heat & Power is an integral part of the Slough Trading Estate. It has
electricity generating capacity of 100 MW, half of which is typically applied
to estate customers and half is available for export to the Grid. It also
supplies steam and water to estate occupiers. Despite unchanged year on year
volume sales to the estate and several important plant efficiency
improvements, the loss of our Non Fossil Fuel Obligation contract which
expired at the end of 1998 still leaves a revenue/cost gap.
The increase in fuel prices, particularly gas, in the second half of 2000 only
added to the deficiency, resulting in an operating profit shortfall of £3.6
million for the year. The New Electricity Trading Arrangements, which are
scheduled to take effect in April 2001, provide small operators such as Slough
Heat & Power with little confidence that the Government is concerned about the
interests of combined heat and power or other environmentally friendly
providers of electricity. Consequently the financial result for 2001 is hard
to predict.
To mitigate this, Slough Heat & Power are pursuing two initiatives, firstly,
to sell more electricity to estate customers at consumer prices rather than to
the wholesale market. This ample but secure electricity source, together with
a wide choice of suppliers of cable communications on the Estate is proving
attractive to internet service and communications providers who typically have
very large power requirements.
More importantly, in 1998 Slough Heat & Power were awarded a 15 year, indexed
price, Non Fossil Fuel Obligation fourth round contract to supply 11 MW of
electricity from a new boiler and generator fuelled by paper, plastic and
fibrous waste materials. The plant to produce the fuel and the generating
plant is currently under construction for commissioning early in 2002. The
secure revenue stream that this will provide should have a major impact on the
company's profitability.
Management Buy Out Investments
For many years the Group has participated in management buy out funds managed
by Candover Investments plc in the UK and Charterhouse Group International Inc
in the USA. Through these funds the Group has investments in over 50
businesses. The year end book values of the Group's investment in these funds
was £36.6 million, compared to the fund managers' valuations of £49.5 million.
Uncalled commitments to Candover and Charterhouse funds amount to £14.7
million.
Equity Interests in Californian Tenants
The Group's property developments in South San Francisco and San Diego are
home to many knowledge-led start up companies, particularly in the field of
health science. As part of the pre-letting agreement, but not to the
diminution of the basic property deal, Slough has been granted equity warrants
over a total of 1,945,000 shares in seventeen different companies.
Outstanding warrants not realised include 1,090,000 in companies yet to seek
an exchange listing, and 855,000 in listed companies. The ultimate realisable
value of these warrants, carried in the books at nil value, is impossible to
determine.
Tipperary
Tipperary Corporation is an independent energy company headquartered in
Denver, Colorado and quoted on the American Stock Exchange. It is focused
primarily on exploration for and production of coalbed methane. It owns
Tipperary Oil and Gas (Australia) Pty Ltd which holds a 62.5 per cent interest
in south-eastern Queensland's 1.1 million acre Comet Ridge methane project as
well as its own exploration permits in Queensland. In its annual letter to
shareholders it reported that its 'proved' gas reserves increased by 74 per
cent to 265 Bcf, valued at US$94 million together with significantly larger
'probable' gas reserves.
The Group has held an equity interest in Tipperary since 1986 and now owns
53.2 per cent with a book value of £12.6 million and a market value of £28.4
million at year end. The Group will continue to hold Tipperary stock until
the full value of Comet Ridge is realisable.
EXTRACTS FROM THE FINANCIAL REVIEW
Results
Pre-tax profit, excluding the effect of investment property sales, increased
by 10.8 per cent in 2000 from £115.8 million to £128.3 million. Earnings per
share, adjusted on a similar basis, grew by 18.4 per cent to 25.7 pence.
Once again, the main feature of the improvement in results in 2000 was the
significant rise in core or maintainable earnings. Core profit before tax was
up by 11.9 per cent to £116.0 million, and has shown annual compound growth of
15.2 per cent over the last five years. These superior returns are very much
due to the Group's continued commitment to developing and owning quality
properties in prime business centres in the UK and overseas. Core earnings
comprise property investment, property joint ventures and utilities income,
less administration and net interest costs.
Property investment income of £196.7 million in 2000 was £14.1 million or 7.7
per cent higher than that of 1999, despite the considerable level of property
sales during the last two years. The rationalisation of the Bilton portfolio
and other properties that do not fit the Group's strategic objectives has
entailed disposals amounting to some £215.2 million over this period. The
effect has been to reduce year-on-year net rentals by £10.5 million. The
positive effect of the development programme continues, with new developments
and acquisitions contributing an additional £17.0 million to rental income in
2000, on top of 1999's £19.2 million. The underlying increase in net rental
income was £7.6 million, after adjusting for the effect of acquisitions, new
developments and property sales. The £4.4 million rise in property joint
ventures' operating profit in 2000 was due to a full year's income from
Buchanan Galleries, which opened in March 1999.
As far as future prospects are concerned, the main influences on rental income
will be new developments, property disposals and the level of rental rates.
The great improvement in core earnings over the last few years has been
largely due to the progress made with the development programme. Emphasis
will remain on achieving significantly higher returns on incremental
development expenditure than is possible through the acquisition of existing
'dry' income producing properties. Extra year-on-year rental income of £24.0
million has already been secured on recent completions or properties currently
under development. Rental income in 2001 will be adversely affected by some
£4.3 million from the effect of property sales completed during 2000 and early
in 2001.
There has been further rental growth during 2000. Consequently, the UK
portfolio moved from being 9.8 per cent to 13.2 per cent reversionary over the
year. This equates to £19.8m of potential future rental income as leases are
reviewed or properties re-let.
63 per cent of the current UK rent roll is secured on leases with at least
ten years unexpired, or 49 per cent if all earlier break clauses are treated
as expiries. Overseas, the customary length of lease is for shorter periods
but any resultant reduced level of income security is compensated by the
greater mobility of businesses. With over 1,500 tenants in the UK and just
under 2,150 worldwide, the Group is not dependent on any one customer for its
principal revenues.
Net interest costs rose by £5.9 million in 2000 to £78.2 million. Net
interest payable (before capitalisation of interest) was up by £6.2 million
from £94.3 million to £100.5 million. The increase was largely due to the
effects of recently completed properties (£12.4 million), partly offset by
1999/2000 property sales (£7.3 million). Of the £22.3 million of interest
capitalised, 39 per cent related to developments that were either pre-sold or
covered by agreed lettings. Gross interest cover of 2.1 times was at the same
level as that of 1999.
The Group's non core activities, involving property trading, other income and
share of non-property associates, had another good year, with profit moving up
a little from £12.1 million to £12.3 million.
A high level of trading property profit was generated again, increasing from
£6.1 million to £6.7 million. The main contributors were the projects at Rue
Vineuse in Paris, Evry (phase 2) and Neuss (phase 3). There are sufficient
projects underway to suggest a reasonable level of trading profits in 2001.
Returns of £5.6 million from other activities were only £0.4 million down on
last year. Contributions of £4.4 million were made from the Candover and
CHUSA investments, against £5.6 million in 1999. £36.6 million remains
invested in these funds, with a further commitment to them of £14.7 million.
Future profits can therefore be expected, although the timing and quantum
thereof are difficult to predict.
The Group's effective tax rate of 8.0 per cent was lower than 1999's 11.4 per
cent. Both years benefited from the measures that were taken during 1998 to
alleviate the Group's surplus advance corporation tax position. These
benefits will become fully utilised during 2001. The effective tax rate is
therefore expected to rise to circa 15 per cent in 2001 and to a more normal
20 per cent thereafter.
The Board has proposed a total dividend of 12.1 pence per share for 2000, an
increase of 8.0 per cent on 1999. Dividend cover, adjusted to exclude the
effect of investment property sales, was up from 1.9 times in 1999 to 2.1
times. Core income dividend cover improved from 1.7 times to 1.9 times.
Cash Flow
The net cash inflow from operations of £179.6 million was £8.4 million higher
than in 1999. After paying all interest, dividends and tax, there was a free
cash inflow of £29.7 million. Spend on the investment property development
programme of £264.4 million significantly exceeded proceeds of £49.6 million
from investment property sales. Overall, there was a net cash outflow of
£199.6 million for the year.
Balance Sheet
The £320.2 million increase in shareholders' funds to £2,427.1 million during
the year was largely due to the £254.3 million revaluation surplus on the
Group's investment properties and retained profit of £56.5 million. As a
consequence, diluted net assets per share rose by 15.0 per cent to 520 pence
per share.
Although year end net borrowings of £1,307.6 million were £217.7 million
higher than at the end of 1999, gearing (the ratio of net borrowings to
shareholders' funds) only moved up marginally from 52 per cent in 1999 to 54
per cent at the end of 2000 thanks mainly to the revaluation surplus. The
exchange rate effect increased net borrowings by £32 million.
Two new financings were achieved during 2000, a £225 million Eurobond 2024
issue at a coupon of 6.75 per cent and a $160 million US private placement
with an average maturity of 10.7 years and average interest rate of 7.96 per
cent. Since the year end, another unsecured Eurobond issue raised £150
million for 21 years at a coupon of 7 per cent. These funds will provide a
base alongside committed bank facilities for the Group's substantial
development programme.
The Group operates a UK based centralised treasury function. Its objectives
are to meet the financing requirements of the Group on a cost effective basis,
whilst maintaining a prudent financial position. It is not a profit centre
and speculative transactions are not permitted. Board policies are laid down
covering the parameters of the department's operations including the interest
rate mix of borrowings, net assets exposed to exchange rate movements and
aggregate exposure limits to individual financial institutions. Derivative
instruments are used to hedge real underlying debt, cash or asset positions
and to convert one currency to another. Approval to enter into derivative
instruments which affect the Group's exposure is required from a committee of
executive directors prior to transacting.
The main financial risks facing the Group are liquidity risk, interest rate
risk and foreign exchange translation exposure.
As regards liquidity, as property investment is a long term business, the
Group's policy is to finance it primarily with equity and medium and long term
borrowings. The weighted average maturity of borrowings at the year end was
12.2 years. £100.8 million of debt is due for repayment or rollover in
2001/2002. £1,057.2 million or 79 per cent of the Group's gross debt of
£1,344.5 million has a maturity date beyond the year 2005.
At the year end the Group had £36.9 million of cash balances on deposit and
£468.1 million of undrawn committed bank facilities. This availability,
together with the aforementioned £150 million Eurobond proceeds are more than
adequate to cover the Group's development plans over the next two years or so.
Spend on the development programme is expected to amount to some £350 million
in 2001 and about £250 million in 2002. This will obviously depend on
progress made in planning and, in some instances, pre-leasing. There are no
restrictions on the transfer of funds between the parent and subsidiary
companies. All covenants in bank or loan agreements restricting the extent to
which the Group may borrow leave substantial headroom for the Group to expand
its operations.
The Group's approach to interest rate risk is that at least 70 per cent of the
gross debt portfolio must attract a fixed rate of interest or be variable rate
debt hedged with a derivative instrument providing a maximum interest rate
payable. At the year end 82 per cent of the debt portfolio was at fixed
rate. The weighted average cost of fixed rate debt was 8.1 per cent which
falls to 7.8 per cent when variable rate debt is included.
The main currency risk is translation exposure, i.e. the exchange rate effect
of retranslating overseas currency denominated assets back into sterling at
each balance sheet date. The Group's policy is that currency assets should be
substantially hedged by maintaining liabilities (normally debt or currency
swaps) in a similar currency. Net assets exposed to exchange rate
fluctuations amounted to £334.6 million. A 10 per cent movement in the value
of sterling against all currencies affects net assets per share by 1.4 per
cent although experience shows that sterling rarely moves in the same
direction against all currencies.
A number of the Group's historic fundings are at fixed interest rates which
are high compared with current rates, but which reflect market conditions at
the time they were completed. FRS13 requires the disclosure of the 'fair
value' of these loans and derivatives. The fair value at 31 December 2000 of
the Group's borrowings was some £113.3 million higher than book value before
tax or £79.3 million after tax. It is important to realise that the Group is
under no obligation to repay these loans at anything other than their nominal
value at the original maturity dates.
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